Absorptive capacity: a review, reconceptualization, and extension - Zahra & George - Article

Absorptive capacity (ACAP) has been studied in analyses of diverse, significant and complex organizational phenomena. The study of ACAP remains difficult because of the ambiguity and diversity of its definitions, components, antecedents and outcomes. In this article, a reconceptualization of ACAP will be proposed. It is suggested that ACAP exists as two subsets of potential and realized ACAP. There will be made three contributions to the literature in this article.

Past research on ACAP

Table 1 (p. 187) summarizes representative empirical studies using ACAP, showing that researchers have studied the effects of ACAP at different levels of analysis while adopting multiple measures of this construct. However, it is unclear if these measures converge to capture similar attributes of the same construct, so there must come a much-needed dialogue on the definition and dimensions of ACAP. Analysis of past research reveals three definitions that have dominated the literature on ACAP. These definitions converge to some extent, but also differ in major ways and highlight different dimensions, as summarized in table 2 (p. 188). As table 2 indicates, there is agreement that ACAP is a multidimensional construct involving the ability to value, assimilate and apply knowledge or is a combination of effort and knowledge bases. However, as summarized in table 1, empirical studies do not always capture the rich theoretical arguments and the multidimensionality ACAP.

A reconceptualization of ACAP

ACAP is a set of organizational routines and processes by which firm acquire, assimilate, transform and exploit knowledge to produce a dynamic organizational capability. These four capabilities represent four dimensions of ACAP. Our definition departs from past research in two ways. First, ACAP is viewed as a dynamic capability embedded in a firm’s routines and processes. Second, this definition suggests that the four capabilities that make up ACAP are combinative in nature and build upon each other to produce a dynamic organizational capability. A capability is a high level routine that, together with its implementing input flows, confers upon an organization’s management a set of decision options for producing significant outputs of a particular type. Dynamic capabilities are geared toward effecting organizational change; they are essentially strategic in nature and, therefore, define the firm’s path of evolution and development. ACAP is a dynamic capability that influences the firm’s ability to create and deploy the knowledge necessary to build other organizational capabilities. These diverse capabilities give the firm a foundation on which to achieve a competitive advantage that yields superior performance.

Dimensions of ACAP

In table 3 (p. 189), each of the four dimensions that compose ACAP to its respective components, roles and importance is related. It highlights four distinct, but complementary capabilities that compose a firm’s ACAP: acquisition, assimilation, transformation and exploitation.

Acquisition. Refers to a firm’s capability to identify and acquire externally generated knowledge that is critical to its operations. Three attributes that can influence ACAP are intensity, speed and direction. There are limits to a firm’s ability to achieve speed.

Assimilation. Refers to the firm’s routines and processes that allow it to analyse, process, interpret and understand the information obtained from external sources. Externally acquired knowledge may embody heuristics that differ significantly from those used by the firm, delaying comprehension of the knowledge. This knowledge is context-specific and therefore it is more difficult to obtain comprehension from outside.

Transformation. Refers to a firm’s capability to develop and refine the routines that facilitate combining existing knowledge and the newly acquired and assimilated knowledge. This is accomplished by adding or deleting knowledge or simply by interpreting the same knowledge in a different matter. Transformation changes the character of knowledge through bisociation, which occurs when a situation or idea is perceived in “two self-consistent but incompatible frames of reference”. Transformation capability yields new insights, facilitates the recognition of opportunities, and alters the way the firm sees itself and its competitive landscape.

Exploitation. Exploitation as an organizational capability is based on the routines that allow firms to refine, extend and leverage existing competencies or to create new ones by incorporating acquired and transformed knowledge into its operations. The primary emphasis is on the routines that allow firms to exploit knowledge. Exploitation requires retrieving knowledge that has already been created and internalized for use. The outcomes of systematic exploitation routines are the persistent creation of new goods, systems, processes, knowledge or new organizational forms.

Potential and realized ACAP

Potential ACAP (PACAP) makes the firm receptive to acquiring and assimilating external knowledge, but does not guarantee the exploitation of this knowledge. Realized ACAP (RACAP) is a function of the transformation and exploitation capabilities and reflects the firm’s capacity to leverage the knowledge that has been absorbed. Both subsets of ACAP coexist at all times and fulfil a necessary but insufficient condition to improve firm performance. A high PACAP does not necessarily imply enhanced performance.

The efficiency factor (η) is the ratio of RACAP to PACAP. This factor suggests that firms vary in their ability to create value from their knowledge base because of variations in their capabilities to transform and exploit knowledge. In firms with a high efficiency factor, with increased performance, RACAP approaches PACAP.

The theoretical distinction between PACAP and RACAP is important in evaluating their unique contributions to a firm’s competitive advantage. First, this distinction helps explain why certain firms are more efficient than others in using ACAP. Second, exogenous and endogenous forces may differentially influence potential and realized ACAP, indicating that different managerial roles are necessary to nurture and harvest these two components of ACAP.

And third, the distinction provides a basis for observing and examining the fluid and non-linear paths which organizations may follow in developing their core competencies.

A model of ACAP

Figure 1 (p. 192) shows a model that connects the antecedents, moderators and outcomes of this construct.

Antecedents of ACAP

External sources and knowledge complementarity. Fig. 1 suggests that external knowledge sources, in various forms, significantly influence PACAP. External knowledge sources include acquisitions, purchasing and inter-organizational relationships. The breadth and depth of knowledge exposure positively influence a firm’s propensity to explore new and related knowledge. However, exposure per se does not guarantee that a firm will have higher levels of ACAP. The diversity of exposure and the degree of overlap between the knowledge bases of the external source and the firm can enhance the firm’s PACAP.

Proposition 1: The greater a firm’s exposure to diverse and complementary external sources of knowledge, the greater the opportunity is for the firm to develop its PACAP

Experience. Firms gain exposure through exposure to, impact of, and knowledge of particular skills and capabilities. Past experience influences the development of future acquisition capabilities and defines the locus of a firm’s technological search. Experience is also closely connected to organizational memory. Next to this, experience significantly influences managerial cognition, which eventually determines a firm’s ability to manage knowledge. Thus, a firm’s PACAP is a path-dependent capability that is influenced by its past experiences that are internalized as organizational memory.

Proposition 2: Experience will influence the development of a firm’s PACAP. Specifically, experience influences the locus of search and the development of path-dependent capabilities of acquisition and assimilation of externally generated knowledge.

Activation triggers. Activation triggers are expected to moderate the impact of knowledge sources and experience on ACAP development. Triggers are events that encourage or compel a firm to respond to specific internal (e.g., crisis, new strategy) or external (e.g., changes in government policies, radical innovations) stimuli. When triggers are wide in their scope and potential impact or are persistent, firms are likely to seek external knowledge. However, some triggers may require a different type of knowledge that is not available within the firm or is not easily acquired on the market. The source of the trigger is likely to influence the locus of technological search (inside or outside the firm).

Proposition 3: Activation triggers will influence the relationship between the source of knowledge and experience and PACAP. Specifically, the source of an activation trigger will influence the locus of search for external sources of knowledge while the intensity of the trigger will influence the investments in developing the requisite acquisition and assimilation capacities.

Social integration mechanisms and the efficiency factor (η) in ACAP

Knowledge exploitation requires the sharing of relevant knowledge among members of the firm. Social integration mechanisms can facilitate the sharing and eventual exploitation of knowledge, either informally (e.g., social networks) or formally (e.g., use of coordinators). Informal mechanisms are useful in exchanging ideas, but formal mechanisms have the advantage of being more systematic.

Proposition 4: Use of social integration mechanisms reduces the gap between PACAP and RACAP, thereby increasing the efficiency factor (η). Social integration mechanisms lower the barrier to information sharing while increasing the efficiency of assimilation and transformation capabilities.

ACAP and sustainable competitive advantage

When resources are valuable, rare, inimitable and non-substitutable, they can give the firm a competitive advantage. As a bundle of knowledge-based capabilities, ACAP can be a source of a firm’s competitive advantage. Two of the most important ways to achieve a competitive advantage are innovation and strategic flexibility. The transformation and exploitation capabilities of RACAP are likely to influence firm performance through product and process innovation. Exploitation capabilities convert knowledge into new products and given that RACAP is based on knowledge exploitation, it enhances performance and yields a competitive advantage. Sustaining a competitive advantage is difficult, because capabilities converge to an industry standard wherein competitor capabilities are similar in key attributes.

Path dependence in developing capabilities can determine a firm’s success or failure. For instance, firms may fall into three types of competence traps (Ahuja & Lampert, 2001): familiarity, maturity and propinquity. Familiarity traps result from an overemphasis on refining and improving existing knowledge, preventing the firm from exploring alternate knowledge sources and limiting the organization’s cognitive schemas. Maturity traps result from a need to have reliable and predictable outputs, which can limit knowledge exploration. Propinquity (nearness) traps reflect a firm’s disposition to explore knowledge in areas closest to its existing expertise, precluding an examination of radical shifts in the industry. These competence traps cause firms to get blindsided by radical innovations that can transform their industry, leading to the firms’ failure. Overcoming the competence traps can be done by well-developed capabilities of acquisition and assimilation (PACAP). Being adept has two dimensions: timing and costs. PACAP plays an important role in renewing a firm’s knowledge base and the skills necessary to compete in changing markets, and therefore in sustaining competitive advantages.

Proposition 5: Firms with well-developed capabilities of knowledge transformation and exploitation (RACAP) are more likely to achieve a competitive advantage through innovation and product development than those with less developed capabilities.

Proposition 6: Firms with well-developed capabilities of knowledge acquisition and assimilation (PACAP) are more likely to sustain a competitive advantage because of greater flexibility in reconfiguring their resource bases and in effectively timing capability deployment at lower costs than those with less developed capabilities.

One factor that can affect a firm’s sustained competitive advantage is the regime of appropriability that dominates its industry. This refers to the institutional and industry dynamics that affect the firm’s ability to protect the advantages of (and benefit from) new products or processes. When appropriability is low (i.e., there is a high level of knowledge spillovers), investments in ACAP are likely to be low. When regimes of appropriability are strong, the payoff from RACAP will be high, because firms can protect their knowledge assets and continue to generate profits from such inventions. Imitation is more difficult because of the increased costs incurred by rivals for knowledge replication, leading to performance differences across firms. Under weak regimes of appropriability, dynamic capabilities may sustain performance differences in the presence of isolating mechanisms: idiosyncratic features of a firm’s management that create impediments to imitation. One such isolating mechanism is secrecy in routines and processes.

Proposition 7: The regime of appropriability moderates the relationship between RACAP and sustainable competitive advantage, specifically as described below.

Proposition 7a: Under strong regimes of appropriability, there will be a significant and positive relationship between RACAP and a sustainable competitive advantage because of the higher costs associated with imitation.

Proposition 7b: Under weak regimes of appropriability, there will be a significant and positive relationship between RACAP and a sustainable competitive advantage only when firms protect their knowledge assets and capabilities through isolating mechanisms. If not, such a relationship is likely to be weak or non-existent.

Future research directions

ACAP provides rich and fruitful avenues for future research. Three primary contributions:

The dimensionality of ACAP and the dimensions’ respective roles and importance are defined and declined (table 3);

The distinction between PACAP and RACAP suggests that externally acquired knowledge undergoes multiple iterative processes before the recipient firm can successfully exploit it to achieve a competitive advantage.

This article makes clear that in past studies researchers fall short by overlooking the contingent conditions under which ACAP could lead to a competitive advantage.

In table 4 (p. 198) the traditional view is contrasted with the proposed reconceptualization.

A key difference lies in the definition of ACAP as a set of knowledge-based capabilities embedded within the firm’s routines and strategic processes. It is also suggested that past experience, knowledge complementarity and diversity of knowledge sources influence PACAP development. However, activation triggers may redefine a firm’s locus of search. Table 4 also highlights the influence of contingent factors and managerial roles on ACAP development. Viewing ACAP as a dynamic capability suggests that it can be formulated and implemented with the specific intent to acquire, assimilate, transform and exploit knowledge. The process of bisociation also suggests that knowledge transformation occurs when managers combine two incongruous frames of reference to arrive at new knowledge that can be exploited for generating profits.

Opportunities for future research:

• There is a clear need to capture the individual capabilities that constitute a firm’s ACAP;
• Researchers need to recognize the temporal aspects of capability development;
• Researchers modelling ACAP would better serve us if they considered the contingencies and boundary conditions of ACAP development;
• Researchers need to measure and relate the potential and realized capabilities to multiple outcomes;
• Address the specific operationalization of the capabilities that ACAP comprises;
• The efficiency factor can be researched further.